Date:April 1, 2023
MSME Limitation Act – Applicability on MSME recovery proceeding
Law Article by NB Associates
Whether there is any limitation on the MSME recovery proceedings which is initiated under the provisions of Sections 17 and 18 of the Micro, Small and Medium Enterprises Development Act, 2006?
Whether there is any MSME Limitation Act?
That is the moot point in this Law Article.
Another moot point would be if the law of limitation applies and the limitation has expired, What MSME can do? What is the way out for MSME? Does MSME have any way out?
There is no specific “MSME Limitation Act” in India. However, there are laws and regulations that apply to Micro, Small, and Medium Enterprises (MSMEs) in India.
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Sections 17 and 18 of the Micro, Small and Medium Enterprises Development Act, 2006 provide for the recovery of the amount due for any goods or services rendered by the supplier.
This is applicable to the supplier which comes under the definition of Micro and Small Enterprises.
| Read more about MSME proceedings for recovery
Micro, Small and Medium Enterprises Development Act, 2006 does not specifically state whether the law of limitation is applied to the claims filed under this Act.
This Act is completely silent on this aspect.
Micro, Small and Medium Enterprises Development Act, 2006 (the ‘Act’) is a special Act.
This kind of specific act/law contains provisions of applicability of the Limitation Act, and other laws, however, this Act is silent on the applicability Limitation Act.
Before proceeding further let’s first see what is the limitation for filing the general money suit.
When it comes to general money suits, the law of limitation is very clear.
Law of Limitation provides that the money suit must be filed within a period of 3 (three) years from the date of cause of action i.e. from the date on which the right to sue arise.
This limitation is, however, subject to certain exceptions provided under Limitation Act.
In respect of the claim under the MSME Act, there has been confusion as to whether Limitation Act applies to claims under MSME Act.
MSME Office has clarified that its FAQ that the Limitation Act is not applicable as the arbitration proceeding arising out of this is statutory arbitration.
So, here comes the judgement of the Hon’ble Supreme Court in the Silpi Industries vs. Kerala State Road Transport Corporation & Anr case.
This case clarified the position as to whether the law of Limitation applies to the MSME recovery proceedings.
The Hon’ble Supreme Court has given a recent Judgment of M/s Silpi Industries vs. Kerala State Road Transport Corporation & Anr (CIVIL APPEAL NOS.1570-1578 OF 2021).
The Hon’ble Supreme Court held that the Limitation Act, 1963 is applicable in the Arbitration under the MSMED act, 2006.
Hon’ble Supreme Court noted :
Does this mean that you can still file a case with MSME Samadhan or the MSME Facilitation Council?
So, as per the judgment, the law of limitation applies to arbitration proceedings initiated under section 18(3) of the Act.
The judgement is however silent on the initial MSME proceeding e.g. filing of the claim with MSME Samadhaan and conciliation proceeding started under section 18(2). And the court has given its verdict on the arbitration proceeding under section 18(3).
Does this mean that you can still avail the facility of MSME Samadhan or MSME facilitation conciliation proceeding under section 18(2), that is the moot question.
Another moot question is whether availing MSME Samadhan facility or the conciliation proceeding will have no meaning in the absence of arbitration proceeding under section 18(3).
Now dealing with the question where limitation has expired, What MSME can do? What is the way out for MSME? Does MSME have any way out?
We think there is a way out in the form of section 22 of the MSMED Act and the mandatory provision of filing Form – 1 i.e. MSME return by the company under the Companies Act.
The above provisions come to the rescue of those who are struggling with the applicability of the law of limitation or for those whose limitation to initiate MSME recovery proceeding as expired.
Any form of entry of MSME debt in the audited financial statement or Form 1 – MSME return filed shall be treated as an acknowledgement of debt, and thus an extension of limitation under section 18 of the Limitation Act.
Section 22 of the Act mandates buyers to disclose the amount due to the suppliers in their audited financial statement.
Section 22 of the Micro, Small and Medium Enterprises Development (MSMED) Act mandates that all companies which have dues payable to micro and small enterprises must submit an annual statement of accounts specifying the amount of payment due and the reasons for the delay.
This statement must also include the amount of interest that has accrued on the unpaid amount, calculated in accordance with the provisions of the MSMED Act.
This requirement aims to ensure that micro and small enterprises are paid on time and that their dues are not held up indefinitely, which can lead to financial difficulties for these enterprises.
The natural consequence of the above is the admission or written acknowledgement of the debt by the buyer and thus help from section 18 of the Limitation Act, 1963.
Under the Companies Act, a company is required to file its financial statements and annual returns with the Registrar of Companies (RoC) within a specified time period. In addition to this, if the company has any outstanding payments due to micro and small enterprises, it is also required to file an MSME return in Form-1 under the MSMED Act
The MSME Form-1 requires the company to provide details such as the name of the enterprise, its type, PAN (Permanent Account Number), Aadhaar number, location, and bank account details. The form also requires the company to specify the amount of payment due and the reasons for the delay and to include the amount of interest that has accrued on the unpaid amount, calculated in accordance with the provisions of the MSMED Act.
How long can the seller/supplier delay the filing of such a claim before the MSEFC? This was a major loophole in the MSMED Act, 2006 which was resolved now by the Hon’ble Supreme Court of India.
Thus, the Limitation Act applies to MSMED Act, and a claim before MSEFC must be filed within 3 years from the date the right to sue arise.
In case of delay or expiry of 3 years, the MSME can have assistance from the MSME return in Form -1 filed by a company or from the provisions of section 22 of the Act.
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